Legal loan sharks will be stopped from charging sky-high interest rates after a major climbdown by the Coalition.

Ministers accepted a Labour amendment to let a new watchdog cap the rates charged by payday lenders such as Wonga if there is evidence of “consumer detriment”.

The Financial Conduct Authority will be able to overturn “payday loan” agreements if lenders flout the cap.

It can also clamp down on rogue traders who force people deeper into debt.

The decision is a major victory for the Daily Mirror’s “End Legal Loan Sharking” campaign.

The Government, which was set to lose a vote on the issue in the Lords, said it would now come forward with its own amendment, but pledged to give Labour and new Archbishop of Canterbury Justin Welby, who backed the proposal, a final say on the wording.

But the legislation still has to win support in the House of Commons and there are fears coalition ministers could water down the changes.

Labour peer Lord Mitchell who first put forward the amendment, said the deal was, “as much as we could have hoped for”.

"I am pleased": Stella Creasy MP (Photo: PA)

He said: “The winners are those who have campaigned for this change. The other most welcome winners are those who live in the hell hole of grinding debt.

“The losers are clearly the loan-sharks and payday lending companies. They have tried every trick in the book to keep this legislation from being approved.”

Shadow Treasury Minister Chris Leslie said: “It shouldn’t have taken nine months since we tabled this amendment for the Government to cave in.

“A growing number of people from across the political spectrum have been uncomfortable with the Treasury’s stubborn refusal to take tougher action.

“We now need the Financial Conduct Authority to act on these powers and tackle high-charging payday lenders who are exploiting some of the poorest and most vulnerable in society.”

The Daily Mirror has been fighting for more than two years for curbs on Britain’s booming payday lending industry.

We backed Labour MP Stella Creasy’s call in 2010 for a cap on the total cost of a loan, but the Government blocked all attempts to change the law.

She said: “Certainly I am pleased. The principle that self regulation doesn’t work has been won.”